Mythematics - 3

The real problem

First, let me apologise for the long gap since I last wrote on Substack. I had been writing roughly every week, and any regular reader might be forgiven for asking why I took half a year off. I won’t bore you with excuses and explanations, but I will assure you that I intend to be writing more regularly in future, and asking what forensic psychology (the former day job) has to say about some problems in the news.

Second, let me recap briefly. Mythematics 1 suggested that government policy had been misapplied for some decades, ever since the days of Thatcher and Reagan with their exclusive reliance on the markets to sort everything out (actually, Thatcher did not entirely do this, and surreptitiously used other means, but that’s another story). The article concluded that modern capitalist economics had much more in common with gambling than it did with rational decision-making. Mythematics 2 went on to look at the scapegoats often chosen for today’s problems, concluding that they were largely immigrants and Social Security claimants. Neither of these allegations is justified, but both are popularly used by right-wing parties to explain why uncontrolled capitalism has not brought us the widespread wealth promised forty years ago.

The real problem is a combination of things. On the one hand, governments have been reluctant to upset “the markets” by establishing controls on capitalist activity. On the other, they have been reluctant to upset voters and the right-wing media which have given people handy scapegoats to blame. Both of these factors can be seen in recent policy statements – even from some left-wing governments – concerning prudent fiscal rules and the need to put up barriers to immigration. The former is usually a statement that emphasises the importance of controlling public spending and cutting government borrowing, while promising to provide more public benefits (one might think it would be hard to do both). The latter is usually combined with an assurance that the government is only against illegal migration, and not immigration in general. In other words, we are back to psychology again, this time the psychology of anxiety. Governments are afraid to be bold. They are afraid to spook the markets, and they are afraid to be innovative in case they spook the voters.

They say this stuff makes the world go round…

This is not a call for governments to introduce crazy off-the-wall policies. That really would spook the markets, as it did when Liz Truss was Prime Minister of the UK and proposed to borrow £50 billion to finance tax cuts that would mainly benefit the better-off. She thought this would kickstart the British economy, but her view was not widely shared. Indeed, most other people thought it was plain delusional. This is why Liz Truss became the UK’s shortest serving Prime Minister ever at forty-nine days. She should have born in mind that there is no mathematical difference between government spending and tax cuts. To put it another way, tax cuts are a form of government spending because they cost the government part of its income. (In the Liz Truss proposal that would have been a great deal of income). The markets will certainly be spooked if governments borrow money simply to finance current expenditure. They expect current expenditure to be financed out of income. But borrowing for investment is a different matter. For example, investment in transport links may boost a country’s economic capabilities. Investment in education infrastructure may do the same. In other words, prudent investment in a country’s infrastructure brings an economic return. Selling off this infrastructure, as Thatcher and Reagan both did, actually reduces a government’s resources, and the collateral against which it can borrow. This is why the UK Conservative government of 2010 to 2024 suffered two downgrades in its credit rating: they had continued Thatcher’s practice of selling off almost everything the government owned. A low credit rating worsens the conditions under which a government can borrow money (for example, by having to pay higher interest rates).

Mythematics 1 highlighted the steady fall into inequality that has characterised Western societies in the last forty years or so. This is inevitable when a few people acquire enormous wealth: there is simply less left for everyone else. It must be obvious, therefore, that reversing this trend and making sure that wealth is more widely shared should be a primary objective of any government interested in reducing poverty. The aforementioned Conservative government quite explicitly turned its face against that. One government minister went so far as to say that poverty was not the government’s responsibility. An updated version of “let them eat cake”? Not quite – she did also blame local government, not mentioning the fact that Conservative reductions of local government funding had left it unable to do more than the bare minimum. But that same Conservative government declared itself eager to increase prosperity. If you think that government policy can materially increase people’s prosperity, then you must also accept that government policy can reduce it. You can’t have it both ways.

There is another point: most people understand that their government can’t do everything. When a foreign war puts up the price of petrol at the pump, they may expect the government to try to mitigate the problem. But they understand that their own government did not cause the war. In other words, the problem that people have is not simply that their lives are not improving. It is also the fact that they see a few incredibly rich people getting incredibly richer, while they do not. Most people know that the size of the cake may fluctuate. What they want is a fair slice of it, however big the total is for the time being. But when other people are hugely better off, and most are in a state of economic precarity, where any unexpected expense may be a disaster, resentment grows. This is especially true when they know that the very rich have done nothing to earn their riches. This argument was made in my earlier article “Fairness Matters” (September 3, 2024), which also contains links to some of the evidence.

A further advantage of raising up the less well-off is that it cuts the Social Security bill, because being better off means fewer people need or qualify for assistance. In other words, reducing poverty need not mean more handouts from the government: it can be done with fewer. But not under the present system of unregulated economic activity. And people can’t do it themselves without help, as pointed out in an earlier article, “Who wants to be a millionaire?”

…but this fellow obviously doesn’t have much of it.

Finally, an argument made against transferring wealth away from the super-rich is that they will all leave the country. In fact, academics who have researched this tell us that it is not true. (Some less academic individuals are tempted to say “good riddance”). In any case, it need not come to that. For one thing, although wealth is portable, property is not, particularly real estate, so a small property tax is unlikely to drive people out. For another, decisions about where to live are not taken simply on the basis of money. This is particularly true when one has a great deal of money. There are many factors governing why people choose to live where they do, and in which country: perhaps the general atmosphere in society, the crime rate, the climate, schools for one’s children, or the presence of family. Those factors do not go away just because one has money. Furthermore, when taxes on the rich are proposed, those who have a fit of the vapours at the idea tend to forget that taxes on the rich have been very much higher in the past than they are now. In the UK, the top rate of tax is levied on taxable incomes over about £125,000, and is 45% (48% in Scotland). But in the 1960s it was 95%. Some rich people did go abroad to live, but many stayed here. Even in the United States, proverbially the champion of free market capitalism, the top rate of tax was 92%. Cutting these taxes to their present much lower rates has demonstrably not benefited most people. This is one reason why the Patriotic Millionaires group of rich people actually asks to be taxed more. Scandinavian countries, which regularly top the ratings for the happiest populations, have much higher rates of tax, but also vastly better public services.

There is a lesson in that.